<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission File Number: 000-25328
FIRST KEYSTONE FINANCIAL, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-0469351
----------------------------------------- -----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
22 West State Street
Media, Pennsylvania 19063
---------------------------------------------- --------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (610) 565-6210
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Number of shares of Common Stock outstanding as of August 8, 2000: 2,251,716
Transitional Small Business Disclosure Format Yes No X
------ ----
<PAGE> 2
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 2000 (Unaudited) and September 30, 1999 ................................ 1
Consolidated Statements of Income for the Three and Nine
Months Ended June 30, 2000 and 1999 (Unaudited).................................. 2
Consolidated Statement of Changes in Stockholders' Equity for the Nine
Months Ended June 30, 2000 (Unaudited).......................................... 3
Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 2000 (Unaudited)........................................... 4
Notes to Consolidated Financial Statements (Unaudited)........................... 5
Item 2. Managements's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 15
Item 2. Changes in Securities and Use of Proceeds....................................... 15
Item 3. Defaults Upon Senior Securities................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............................ 15
Item 5. Other Information............................................................... 15
Item 6. Exhibits and Reports on Form 8-K................................................ 15
SIGNATURES...................................................................................... 16
</TABLE>
i
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
June 30 September 30
ASSETS 2000 1999
------ ---------- ---------
(Unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions $ 2,612 $ 3,010
Interest-bearing deposits with depository institutions 22,164 17,005
------ -------
Total cash and cash equivalents 24,776 20,015
Investment securities available for sale 47,179 44,315
Mortgage-related securities available for sale 111,798 113,046
Loans held for sale 3,115 1,792
Mortgage-related securities held to maturity - at amortized cost
(approximate fair value of $12,760 at June 30, 2000
and $14,100 at September 30, 1999) 13,396 14,497
Loans receivable - net 233,018 226,375
Accrued interest receivable 2,961 3,096
Real estate owned 1,083 297
Federal Home Loan Bank stock - at cost 6,157 6,157
Office properties and equipment - net 3,691 3,076
Deferred income taxes 3,421 2,749
Prepaid expenses and other assets 14,649 14,711
------- -------
TOTAL ASSETS $465,244 $450,126
======== ========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $275,964 $260,826
Advances from Federal Home Loan Bank 120,360 123,137
Securities sold under agreements to repurchase 19,300 19,300
Accrued interest payable 2,865 2,321
Advances from borrowers for taxes and insurance 3,079 946
Accounts payable and accrued expenses 2,792 3,492
------- -------
Total liabilities 424,360 410,022
------- -------
Company-obligated mandatorily redeemable preferred securities of a subsidiary
trust holding solely junior subordinated debentures of the Company 16,200 16,200
Stockholders' Equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued
Common stock, $.01 par value, 20,000,000 shares authorized; issued
and outstanding: 2,251,716 shares at June 30, 2000
and September 30, 1999 14 14
Additional paid-in capital 13,470 13,408
Common stock acquired by stock benefit plans (1,331) (1,531)
Treasury stock at cost: 468,284 shares (5,622) (5,622)
Accumulated other comprehensive loss (4,301) (2,992)
Retained earnings - partially restricted 22,454 20,627
------- -------
Total stockholders' equity 24,684 23,904
------- -------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY $465,244 $450,126
======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
---------------------------------------------
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30 June 30
------- -------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on:
Loans $ 4,795 $ 4,329 $ 13,783 $ 12,948
Mortgage-related securities 2,199 1,896 6,457 5,857
Investments 862 708 2,467 2,173
Interest-bearing deposits 161 117 400 321
-------- -------- -------- --------
Total interest income 8,017 7,050 23,107 21,299
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on:
Deposits 2,896 2,542 8,340 7,707
Federal Home Loan Bank advances 1,764 1,304 4,914 3,983
Other borrowings 294 300 886 888
-------- -------- -------- --------
Total interest expense 4,954 4,146 14,140 12,578
-------- -------- -------- --------
NET INTEREST INCOME 3,063 2,904 8,967 8,721
PROVISION FOR LOAN LOSSES 105 84 315 184
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,958 2,820 8,652 8,537
-------- -------- -------- --------
NON-INTEREST INCOME (LOSS):
Service charges and other fees 246 222 698 697
Net gain on sale of:
Loans 58 70 171 270
Investment securities 42 291
Real estate owned 25 8 16 8
Real estate operations (27) (68) (72) (92)
Other income 474 98 823 207
-------- -------- -------- --------
Total non-interest income 776 372 1,636 1,381
-------- -------- -------- --------
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,033 876 2,801 2,662
Occupancy and equipment expenses 287 258 832 771
Professional fees 242 142 727 435
Federal deposit insurance premium 14 37 66 110
Bank service charges 124 123 372 326
Data processing 100 98 301 290
Advertising 84 90 278 247
Provision for real estate owned losses 350
Minority interest in expense of subsidiary 393 393 1,179 1,179
Other 337 206 805 783
-------- -------- -------- --------
Total non-interest expense 2,614 2,223 7,361 7,153
-------- -------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 1,120 969 2,927 2,765
INCOME TAX EXPENSE 261 244 627 668
-------- -------- -------- --------
NET INCOME $ 859 $ 725 $ 2,300 $ 2,097
======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE $ 0.42 $ 0.35 $ 1.11 $ 1.03
======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE $ 0.41 $ 0.34 $ 1.07 $ 0.98
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
---------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
Common
stock Accumulated Retained
Additional acquired by other earnings- Total
Common paid-in stock benefit Treasury comprehensive partially stockholders'
stock capital plans stock loss restricted equity
----- ------- ----- ----- ---- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1999 $14 $13,408 $(1,531) $(5,622) $(2,992) $20,627 $23,904
Net income 2,300 2,300
Other comprehensive loss, net of tax (1,309) (1,309)
ESOP stock committed to be released 95 95
Excess of fair value above cost of
ESOP and RRP shares
committed to be released 62 62
RRP amortization 105 105
Dividends - $.21 per share (473) (473)
--- ------- ------- ------- ------- ------- -------
BALANCE AT JUNE 30, 2000 $14 $13,470 $(1,331) $(5,622) $(4,301) $22,454 $24,684
=== ======= ======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30
-------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,300 $ 2,097
Adjustments to reconcile net income to net
cash used in operating activities:
Provision for depreciation and amortization 323 335
Amortization of premiums and discounts (169) (221)
Gain on sales of:
Loans (171) (270)
Investment securities available for sale (291)
Real estate owned (16) (8)
Provision for loan losses 315 184
Provision for real estate owned losses 350
Amortization of stock benefit plans 262 349
Distribution of policy value in demutualization (278)
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (30,088) (40,113)
Loans sold in the secondary market 28,765 39,617
Deferred income taxes 4
Accrued interest receivable 135 285
Prepaid expenses and other assets 62 (6,965)
Accrued interest payable 544 352
Accrued expenses (700) 352
-------- --------
Net cash provided by (used in) operating activities 1,284 (3,963)
-------- --------
INVESTING ACTIVITIES:
Loans originated (50,048) (75,626)
Purchases of:
Investment securities available for sale (3,033) (20,051)
Mortgage-related securities available for sale (10,826) (38,217)
Purchase of FHLB stock (987)
Proceeds from sales of real estate owned 361 2,120
Proceeds from sales of investment securities 6,791
Principal collected on loans 42,487 50,616
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 12,075
Mortgage-related securities available for sale 10,487 38,414
Mortgage-related securities held to maturity 1,094 3,188
Purchase of property and equipment (938) (591)
Net expenditures on real estate acquired through
foreclosure and in development (128) (24)
-------- --------
Net cash used in investing activities (10,544) (22,292)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 15,138 11,307
Net (decrease) increase in FHLB advances and other borrowings (2,777) 14,909
Net increase in advances from borrowers for taxes and insurance 2,133 2,102
Purchase of treasury stock (1,047)
Cash dividend (473) (409)
-------- --------
Net cash provided by financing activities 14,021 26,862
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 4,761 607
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,015 24,126
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,776 $ 24,733
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest on deposits and borrowings $ 13,596 $ 12,226
Transfers of loans receivable into real estate owned 1,121 1,317
Cash payments of income taxes 275 715
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2000 (UNAUDITED) AND
SEPTEMBER 30, 1999 AND (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
2000 AND 1999
(dollars in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
However, such information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the unaudited
interim periods.
The results of operations of the three and nine month periods ended
June 30, 2000 are not necessarily indicative of the results to be
expected for the fiscal year ending September 30, 2000. The
consolidated financial statements presented herein should be read in
conjunction with the audited consolidated financial statements and
related notes thereto included in the Company's Annual Report to
Stockholders for the year ended September 30, 1999.
Certain information in this quarterly statement may constitute
forward-looking information (within the meaning of the Private
Securities Litigation Reform Act of 1995) that involves risks and
uncertainties that could cause actual results to differ materially from
those estimated. Persons are cautioned that such forward- looking
statements are not guarantees of future performance and are subject to
various factors which could cause actual results to differ materially
from those estimated. These factors include changes in general economic
and market conditions; changes in interest rates, deposit flows, loan
demand, real estate values and competition; changes in accounting
principles, policies or guidelines; and the development of an interest
rate environment that adversely affects the interest rate spread or
other income from the Company's investments and operations.
2. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities
are as follows:
<TABLE>
<CAPTION>
June 30, 2000
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury securities and securities
of U.S. Government agencies:
1 to 5 years $ 8,677 $ 150 $ 8,527
5 to 10 years 6,996 $ 9 322 6,683
Municipal obligations 18,929 3 977 17,955
Corporate bonds 4,910 372 4,538
Mutual funds 2,000 34 1,966
Preferred stocks 5,530 887 4,643
Other equity investments 2,778 208 119 2,867
-------- ---- ------- --------
Total $49,820 $220 $2,861 $47,179
======= ==== ====== =======
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury securities and securities
of U.S. Government agencies:
1 to 5 years $ 5,746 $ 94 $ 5,652
5 to 10 years 6,994 214 6,780
Municipal obligations 18,924 $1 1,052 17,873
Corporate bonds 4,909 270 4,639
Mutual funds 2,000 28 1,972
Preferred stocks 5,534 286 5,248
Other equity investments 2,390 239 2,151
-------- --- ------- --------
Total $46,497 $1 $2,183 $44,315
======= == ====== =======
</TABLE>
3. MORTGAGE-RELATED SECURITIES
Mortgage-related securities available for sale and
mortgage-related securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
June 30, 2000
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Available for Sale:
FHLMC pass-through certificates $ 10,499 $ 9 $ 275 $ 10,233
FNMA pass-through certificates 30,868 8 1,253 29,623
GNMA pass-through certificates 38,243 5 1,079 37,169
Collateralized mortgage obligations 36,080 77 1,384 34,773
--------- --- ------ ---------
Total $115,690 $ 99 $3,991 $111,798
======== ==== ====== ========
Held to Maturity:
FHLMC pass-through certificates $ 2,935 $1 $106 $ 2,830
FNMA pass-through certificates 5,977 297 5,680
Collateralized mortgage obligations 4,484 234 4,250
-------- --- ---- --------
Total $13,396 $1 $637 $12,760
======= == ==== =======
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Available for Sale:
FHLMC pass-through certificates $ 11,927 $ 81 $ 174 $ 11,834
FNMA pass-through certificates 32,795 37 877 31,955
GNMA pass-through certificates 34,639 75 755 33,959
Collateralized mortgage obligations 36,054 111 867 35,298
-------- ---- ------ --------
Total $115,415 $304 $2,673 $113,046
======== ==== ====== ========
Held to Maturity:
FHLMC pass-through certificates $ 3,156 $11 $ 67 $ 3,100
FNMA pass-through certificates 6,832 232 6,600
Collateralized mortgage obligations 4,509 109 4,400
------- ---- ---- --------
Total $14,497 $11 $408 $14,100
======= === ==== =======
</TABLE>
The collateralized mortgage obligations contain both fixed and
adjustable classes of bonds which are repaid in accordance with a
predetermined priority. The underlying collateral of the bonds
primarily consist of loans which are insured or guaranteed by FHLMC,
FNMA, or the GNMA.
The mortgage-related securities designated as available for sale, by
definition, could be sold in response to changes in interest rates and
cash flows or for restructuring purposes.
7
<PAGE> 10
5. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
June 30 September 30
2000 1999
------------ ------------
<S> <C> <C>
Real estate loans:
Single-family $163,640 $166,802
Construction and land 17,507 18,426
Multi-family and commercial 35,415 31,188
Consumer loans:
Home equity and lines of credit 20,778 18,624
Deposit 207 243
Education 314 365
Other 868 1,080
Commercial loans 7,120 2,190
--------- ---------
Total loans 245,849 238,918
Loans in process (9,504) (9,005)
Allowance for loan losses (1,927) (1,928)
Deferred loan fees (1,400) (1,610)
--------- ---------
Loans receivable - net $233,018 $226,375
======== ========
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Nine Months Ended
June 30
-------
2000 1999
---------- ------
<S> <C> <C>
Balance beginning of period $1,928 $1,738
Provisions charged to income 315 184
Charge-offs (316) (67)
Recoveries 2
------ ------
Total $1,927 $1,857
====== ======
</TABLE>
At June 30, 2000 and September 30, 1999, non-performing loans (which
consist of loans in excess of 90 days delinquent) amounted to
approximately $2,025 and $3,180, respectively.
6. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
June 30 September 30
2000 1999
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 10,057 3.6% $ 7,912 3.0%
NOW accounts 38,873 14.1 33,412 12.8
Passbook accounts 40,568 14.7 40,324 15.5
Money market demand accounts 20,580 7.5 19,417 7.4
Certificate accounts 165,886 60.1 159,761 61.3
-------- ----- -------- -----
Total $275,964 100.0% $260,826 100.0%
======== ===== ======== =====
</TABLE>
8
<PAGE> 11
7. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, effective October 1, 1999. The
statement requires disclosure of amounts from transactions and other
events which are currently excluded from the statement of operations
and are recorded directly to stockholders' equity. These transactions
and other events represent foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. Only the last of these
items, however, is currently applicable to the Company.
For the three and nine months ended June 30, 2000 and 1999, the
Company's comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
--------- --------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $ 859 $ 725 $ 2,300 $ 2,097
Net SFAS 115 adjustment 459 (2,579) (1,309) (3,775)
------- ------- ------- -------
Total comprehensive income (loss) $ 1,318 $(1,854) $ 991 $(1,678)
======= ======= ======= =======
</TABLE>
8. EARNINGS PER SHARE
Basic net income per share is based upon the weighted average number of
common shares outstanding, while diluted net income per share is based
upon the weighted average number of common share outstanding and common
share equivalents that would arise from the exercise of dilutive
securities.
The calculated basic and diluted earnings per share ("EPS") is as
follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
------ ------ ----- -----
<S> <C> <C> <C> <C>
Numerator $ 859 $ 725 $ 2,300 $ 2,097
Denominators:
Basic shares outstanding 2,064,807 2,044,095 2,064,769 2,039,771
Effect of dilutive securities 51,730 98,729 80,234 104,032
---------- ---------- ---------- ----------
Diluted shares outstanding 2,116,537 2,142,824 2,145,003 2,143,803
========== ========== ========== ==========
hares outstanding
EPS:
Basic $ 0.42 $ 0.35 $ 1.11 $ 1.03
Diluted $ 0.41 $ 0.34 $ 1.07 $ 0.98
</TABLE>
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND SEPTEMBER 30, 1999
Total assets of the Company increased $15.1 million or 3.4% from $450.1 million
at September 30, 1999 to $465.2 million at June 30, 2000 primarily due to a $6.6
million increase in loans receivable - net, a $4.8 million in cash and cash
equivalents, and a $2.9 million increase in investment securities available for
sale. The increased loan growth was concentrated primarily in commercial real
estate, commercial loans, and home equity loans funded through deposits and cash
flows and reflected the Company's continued emphasis on originating higher
yielding loans.
Deposits increased $15.1 million or 5.4% from $260.8 million at September 30,
1999 to $276.0 million at June 30, 2000. The increase resulted primarily from
the growth in NOW accounts and certificates of deposit.
Stockholders' equity increased $780,000 due to the combined effects of increased
net income for the nine months ended June 30, 2000 partially offset by a
decrease in the aggregate market valuation, net of taxes, of available for sale
securities and dividends paid.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 2000 AND 1999
Net Income.
Net income was $859,000 for the three months ended June 30, 2000 as compared to
$725,000 for the same period in 1999 while net income for the nine month period
ended June 30, 2000 was $2.3 million as compared to $2.1 million for the same
period in 1999. The $134,000 or 18.5% increase in net income for the three
months ended June 30, 2000 was due to a $138,000 increase in net interest income
after provision for loan losses and a $404,000 increase in non-interest income
partially offset by a $391,000 increase in non-interest expense. The $203,000 or
9.7% increase in net income for the nine months ended June 30, 2000 compared to
the same period in 1999 was primarily due to increases of $115,000 and $255,000
in net interest income after provision for loan losses and non-interest income,
respectively, together with a $41,000 decrease in income tax expense partially
offset by a $208,000 increase in non-interest expense.
10
<PAGE> 13
Net Interest Income.
Net interest income increased $159,000 to $3.1 million and $246,000 to $9.0
million for the three and nine months ended June 30, 2000, respectively. Such
increases were primarily due to a $967,000 or 13.7% and $1.8 million or 8.5%
increases in interest income for the three and nine months ended June 30, 2000,
respectively, which were partially offset by $808,000 or 19.5% and $1.6 million
or 12.4% increases in interest expense during such periods. The average balance
of interest-earning assets increased $22.1 million and $16.0 million for the
three and nine months ended June 30, 2000, respectively, as compared to the same
period in 1999. Calculated on a fully taxable equivalent basis, the weighted
average yield earned on interest-earning assets for the three and nine months
ended June 30, 2000 increased 53 basis points to 7.58% and 30 basis points to
7.44%, respectively, compared to the 1999 periods. In addition, net interest
income was affected by an increase in the average balance of interest-bearing
liabilities of $33.7 million and $27.2 million for the three and nine months
ended June 30, 2000, respectively, as compared to the same period in 1999. The
weighted average rate paid on such liabilities increased 42 basis points to 4.84
% and 21 basis points to 4.70% during the three and nine months ended June 30,
2000, respectively, as compared to 4.42% and to 4.49%, respectively, during the
three and nine months ended June 30, 1999. The interest rate spread amounted to
2.74% and 2.63% for the three months ended June 30, 2000 and 1999, respectively,
while the net interest margin remained at 2.96%. The interest rate spread and
net interest margin were 2.73% and 2.95%, respectively, for the nine months
ended June 30, 2000 as compared to 2.65% and 2.98% for the same periods in 1999.
The increase in the net interest rate spread was primarily due to improvement in
the yield on Company's investment and mortgage-related securities during fiscal
2000.
Provision for Loan Losses.
Provisions for loan losses are charged to earnings to bring the total allowance
for loan losses to a level considered appropriate by management based on
historical experience, the volume and type of lending conducted by the Company,
the amount of the Company's classified assets, the status of past due principal
and interest payments, general economic conditions, particularly as they relate
to the Company's primary market area, and other factors related to the
collectibility of the Company's loan and loans held for sale portfolios. For the
three months ended June 30, 2000, the provision for loan losses amounted to
$105,000 as compared to $84,000 for the same period in 1999. For the nine months
ended June 30, 2000 and 1999, the provision for loan losses was $315,000 and
$184,000, respectively. The provisions in the interim periods of fiscal 1999
reflected a $50,000 allocation of expense to real estate owned. The increase in
fiscal 2000 periods is due to allocations for the current loan portfolio
resulting from increased investment in multi-family and commercial real estate
and commercial business loans which are generally deemed to entail greater
inherent risk of loss. At June 30, 2000, non-performing assets totaled $3.1
million or .67% of total assets, a decrease of $369,000 from September 30, 1999.
The Company's coverage ratio, which is the ratio of the loan loss reserve to
non-performing assets, was 62.0% and 55.5% at June 30, 2000 and September 30,
1999, respectively.
Management will continue to review its loan portfolio to determine the extent,
if any, to which additional loss provisions may be deemed necessary. There can
be no assurance that the allowance for losses will be adequate to cover losses
which may in fact be realized in the future and that additional provisions for
losses will not be required.
<PAGE> 14
Non-interest Income.
Non-interest income increased $404,000 or 108.6% to $776,000 and $255,000 or
18.5% to $1.6 million for the three and nine months ended June 30, 2000,
respectively, as compared to the same periods in 1999. In the third quarter of
fiscal 2000, an increase of $376,000 in other non-interest income was primarily
due to a receipt of a distribution of common stock with a value of $278,000 at
the date of issue in connection with the demutualization of an insurance
company. In addition, the increases during the 2000 periods were due to the
combined effect of a slight increase in service charges and other fees and a
decrease in the loss from real estate operations partially offset by decreases
in the net gain on sale of assets.
Non-interest Expense.
Non-interest expenses increased $391,000 or 17.6% during the three months
ended June 30, 2000 as compared to the same period in 1999. Increases of
$157,000, $100,000 and $131,000 were incurred in the salaries and employee
benefits, professional fees, and other non-interest expenses, respectively. The
increase in salary and employee benefits reflected accruals for certain
incentive bonuses, normal salary adjustments and the hiring of additional
personnel due to branch expansion. The increase in professional fees was
primarily an accrual for legal costs associated with foreclosures. Other
non-interest expenses increased due to one-time fees arising from the use of
temporary employees and the adjustment of various expense accruals.For the nine
months ended, June 30, 2000, non-interest expenses increased $208,000 or 2.9%
due to increases of $139,000, $61,000, $292,000, $46,000, and $22,000 in
salaries and employee benefits, occupancy and equipment, professional fees,
bank service charges and other non-interest expenses, respectively, partially
offset by a $350,000 decrease in the provision for real estate losses.
Income Tax Expense.
Income tax expense increased $17,000 to $261,000 for the three months ended June
30, 2000 compared to June 30, 1999, while decreasing $41,000 to $627,000 for the
nine months ended June 30, 2000. The increase for the third quarter of fiscal
2000 reflected the increase in income before income taxes. For the nine months
ended June 30, 2000, the decrease in taxes resulted from the implementation of
various tax planning strategies including investment in tax-exempt securities.
Liquidity and Capital Resources.
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing and financing activities. The Company's primary
sources of funds are deposits, amortization, prepayment and maturities of
outstanding loans and mortgage-related securities, sales of loans, maturities of
investment securities and other short-term investments, borrowing and funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-related securities and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, the Company invests excess
funds in overnight deposits and other short-term interest-earning assets which
provide liquidity to meet lending requirements. The Company has been able to
generate sufficient cash through its deposits as well as borrowings to satisfy
its funding commitments. At June 30, 2000, the Company had short-term borrowings
outstanding of $65.0 million, all of which consisted of advances from the
Federal Home Loan Bank of Pittsburgh.
<PAGE> 15
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer term basis, the Company maintains a
strategy of investing in various lending products, mortgage-related securities
and investment securities. The Company uses its sources of funds primarily to
meet its ongoing commitments, to pay maturing certificates of deposit and
savings withdrawals, fund loan commitments At June 30, 2000, the total approved
loan commitments outstanding amounted to $11.5 million, not including loans in
process. At the same date, commitments under unused lines of credit amounted to
$16.7 million. Certificates of deposit scheduled to mature in one year or less
at June 30, 2000 totaled $99.1 million. Based upon its historical experience,
management believes that a significant portion of maturing deposits will remain
with the Company.
First Keystone Federal Savings Bank (the "Bank"), the Company's wholly owned
subsidiary, is required by the Office of Thrift Supervision ("OTS") to maintain
average daily balances of liquid assets and short- term liquid assets (as
defined) in amounts equal to 4% of net withdrawable deposits and borrowings
payable in one year or less to assure its ability to meet demand from
withdrawals and repayments of short-term borrowings. The liquidity requirements
may vary from time to time at the direction of the OTS depending upon economic
conditions and deposit flows. The Bank's average monthly liquidity ratio for
June 2000 was 7.61%.
As of June 30, 2000, the Bank had regulatory capital in excess of applicable
limits. The Bank is required under certain federal regulations to maintain
tangible capital equal to at least 1.5% of its adjusted total assets, core
capital equal to at least 4.0% of its adjusted total assets and total capital
equal to at least 8.0% of its total risk-weighted assets. At June 30, 2000, the
Bank had tangible and core capital equal to 8.3% of adjusted total assets and
total capital equal to 18.2% of risk-weighted assets.
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's asset and liability management policies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" in the Company's Annual Report on Form 10-K for the year ended
September 30, 1999.
The Company utilizes reports prepared by the OTS to measure interest rate risk.
Using data from the Bank's quarterly thrift financial reports, the OTS models
the net portfolio value ("NPV") of the Bank over a variety of interest rate
scenarios. The NPV is defined as the present value of expected cash flows from
existing assets less the present value of expected cash flows from existing
liabilities plus the present value of net expected cash inflows from existing
off-balance sheet contracts. The model assumes instantaneous, parallel shifts in
the U.S. Treasury Securities yield curve of 100 to 300 basis points, either up
or down, and in 100 basis point increments.
The interest rate risk analysis used by the OTS include an "Exposure Measure" or
"Post-Shock" NPV ratio and a "Sensitivity Measure". The "Post-Shock" NPV ratio
is the net present value as a percentage of assets over the various yield curve
shifts. A low "Post-Shock" NPV ratio indicates greater exposure to interest rate
risk and can result from a low initial NPV ratio or high sensitivity to changes
in interest rates. The "Sensitivity Measure" is the decline in the NPV ratio, in
basis points, caused by a 2% increase or decrease in rates, whichever produces a
larger decline. The following table sets forth the Bank's NPV as of June 30,
2000.
<TABLE>
<CAPTION>
Net Portfolio Value
Changes in
Rates in Dollar Percentage Net Portfolio Value Change in
Basis Points Amount Change Change As a % of Assets Percentage (1)
------------ ------ ------ ------ ---------------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
300 $14,910 $(29,058) (66.09)% 3.49% (63.19)
200 24,473 (19,496) (44.34) 5.57 (41.24)
100 34,299 (9,670) (21.99) 7.59 (19.94)
0 43,968 9.48
(100) 53,202 9,234 21.00 11.18 17.93
(200) 57,779 13,811 31.41 11.96 20.74
(300) 60,488 16,520 37.57 12.38 23.42
</TABLE>
(1) Based on the portfolio value of the Bank's assets in the base
case scenario
As of June 30, 2000, the Company's NPV was $44.0 million or 9.48% of the market
value of assets. Following a 200 basis point increase in interest rates, the
Company's "post shock" NPV was $24.5 million or 5.57% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(3.91)%.
<PAGE> 17
PART II
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
No. 27 Financial Data Schedule
(b) Reports filed on Form 8-K.
None.
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST KEYSTONE FINANCIAL, INC.
Date: August 11, 2000 By: /s/ Donald S. Guthrie
----------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: August 11, 2000 By: /s/ Thomas M. Kelly
--------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
